Should Income Investors Look At TORC Oil & Gas Ltd. (TSE:TOG) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that TORC Oil & Gas Ltd. (TSE:TOG) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 30th of July in order to be eligible for this dividend, which will be paid on the 15th of August.

TORC Oil & Gas’s next dividend payment will be CA$0.025 per share. Last year, in total, the company distributed CA$0.26 to shareholders. Calculating the last year’s worth of payments shows that TORC Oil & Gas has a trailing yield of 7.4% on the current share price of CA$4.03. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for TORC Oil & Gas

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. An unusually high payout ratio of 307% of its profit suggests something is happening other than the usual distribution of profits to shareholders. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 39% of its free cash flow as dividends, a comfortable payout level for most companies.

It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and TORC Oil & Gas fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

TSX:TOG Historical Dividend Yield, July 25th 2019
TSX:TOG Historical Dividend Yield, July 25th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It’s encouraging to see TORC Oil & Gas has grown its earnings rapidly, up 21% a year for the past five years.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. TORC Oil & Gas has seen its dividend decline 8.2% per annum on average over the past 6 years, which is not great to see. TORC Oil & Gas is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It’s unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

From a dividend perspective, should investors buy or avoid TORC Oil & Gas? It’s good to see earnings per share growing and low cashflow payout ratio, although we’re uncomfortable with TORC Oil & Gas’s paying out such a high percentage of its profit. All things considered, we are not particularly enthused about TORC Oil & Gas from a dividend perspective.

Wondering what the future holds for TORC Oil & Gas? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.